The two managers whom I respect the most, Duquesne Capital chief Stanley Druckenmiller and Jeff Gundlach of DoubleLine Capital, decried the perils of negative interest-rate policies, or NIRPs, that have spread like a plague across the industrialized world.

They complained that myopic monetary and fiscal policies were fostering a debt bubble that will ultimately end badly because investors can’t help but gorge themselves on all of that cheap money.

The theory, proven time and again, is that: Inevitably hedge fund managers will overexpose themselves because they are incentivized to do so. And when they are all crowded in the same trades and no buyers remain, they will panic and try to sell.

And their feverish selling will create losses, not just for them but for the real economy and for all of us private investors. The diminished wealth effect will result in lower consumption and growth will collapse. Factories, malls and real estate will close or tumble, so they say.

If it comes to pass, the fault will all lie largely at the feet of those who made access to all of the cheap money possible. Yes, it always comes down to central banks as the villains.

Utility stocks have been the surprise darlings of the past six months, up 17% since December. And yet they can’t get any love from the pundits. All the smart people say that the strength of the utilities is a sign of the apocalypse — that investors’ ardor for low-growth-but-safe industries shows that the market is too risk-averse to go anywhere.

Yet this conventional wisdom may not be true at all. Jason Goepfert, of Sundial Capital, ran the numbers and found that a big divergence between utilities (new high) vs. cyclicals, like transports, (flat to down) has actually led to good broad-market returns in the long run.

Goepfert went back to 1931 to look for days when the DJ Utility Average closed near a three-year high while the DJ Transportation Average was at least 10% below its own three-year high.

In the shorter-term, the Dow had mixed performance, with some weakness a couple of weeks later. It was negative more often than positive with a negative median return. Yet in the time frames longer than two weeks, the Dow’s returns ranged between good and excellent, Goepfert reports. A month later there were 18 positive returns out of 23 occurrences. Six months later, there were only 3 negatives and the Dow’s average return was more than double a random return.

This divergence actually triggered in March, Goepfert notes, so the current signal wouldn’t be included since one is already active. Regardless, this has not been a useful signal to get out of stocks, he argues, adding: "Like we see so often with common market perceptions, proponents like to drag out one or two historical examples, like 2007 in this case, when in fact there were many more times when the signal failed. We are not considering the rally in utilities to be a negative for stocks. It may actually be a positive factor."

So there you have it. Go utes! This data set, like others I have shown lately, is bullish over the next three to twelve months. Kind of surprising, but you have to go where the evidence leads.

Best wishes,

Jon Markman

Jon began his career as editor, investment columnist and investigative reporter at the Los Angeles Times. As news editor, his staffs won Pulitzer Prizes for spot-news reporting in 1992 and 1994.

In 1997, Microsoft recruited Jon to help launch MSN’s finance channel, where he served as Managing Editor. In that capacity, Markman became the co-inventor on two Microsoft patents.

From 2002 to 2005, Jon served as portfolio manager and senior investment strategist at a multi-strategy hedge fund.

Mr. Markman is the author of five best-selling books, including Reminiscences of a Stock Operator: Annotated Edition; New Day Trader’s Advantage, Swing Trading and Online Investing.

{8 comments }

Ernie WoodhouseTuesday, May 10, 2016 at 8:50 am

Why the reference to Woodstock? Your link led to Santana’s great performance of Soul Sacrifice. So the hedge fund managers sacrifice their soul and all follow the herd. Was that it?

Kind of cryptic, but very good.

IvanoTuesday, May 10, 2016 at 10:29 am

Like always… the big boys will win this race and the retail investor will be the big loser. Nothing changes in the security markets. Hedge funds and Buffett will be tipped off ahead of the masses. Hedge fund gurus will dump their shares on the market and retail portfolios will evaporate. Three cheers for the efficient “free market”.

Eagle495Tuesday, May 10, 2016 at 5:20 pm

B.S,, Until we get those “Big Boys” back under the Restrictions of the Glass-Steagall Act, the markets are incredibly vulnerable to another Stock Market Crash and Depression.. :(

real americans dont lieWednesday, May 11, 2016 at 2:13 am

The more i look at the debt load the the united states faces its clear the sustainability of the U.S. to pay its debts and to provide services to its citizenry is definitely in jeopardy , for how long… can we still keep going down this road is anyone’s guess . I guess the saying hope for the best and prepare for the worst may have some merit for our future.

IvanoTuesday, May 10, 2016 at 8:40 pm

If the SEC would just enforce the existing laws… with prison time… it would help, but Soros never was punished and many others like him never served a second in prison. We need reinstatement of Glass-Steagall Act, but unless the SEC enforces the laws… for inside trading and many other transgressions, the retail investor is the sucker in this game. Every one worships Buffett, yet he never makes a bad trade? Come on, statistically that is impossible, that he is never wrong! There are many others who need close watching since the market is efficient for retail investors but not hedge funds. !! Give me a break !!

steveMonday, June 6, 2016 at 3:13 pm

who said WARREN HAS NEVER MADE A BAD BET? Hell, just recently ,he lost 11 billion on a bad bet. Its just he has a lot more than the average person, so an 11 billion loss isn’t life changing to him.

JamesWednesday, May 11, 2016 at 2:27 pm

This recession is setting the super rich off against the rich. Where’s larry is he back in Japan yet? Larry Edelson is calling this recession as it plays out.

GregSaturday, May 14, 2016 at 11:03 am

James,

There is no recession for either the rich or supper rich. The middle class is taped out. The poor are on the dole. The Government bureaucrats live well. Now, the only place left to troll for money are the rich or the FED.